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On the 31st December of 2020, Bank Negara Malaysia (BNM) issued the Policy Document on Licensing Framework for Digital Banks, a set of digital licence banking frameworks that marks the beginning of digital banking in Malaysia. With the winners of the new digital banking licences announced, Boost Holdings Sdn. Bhd. and RHB Bank Berhad, GXS Bank Pte. Ltd. and Kuok Brothers Sdn. Bhd, Sea Limited and YTL Digital Capital Sdn Bhd, KAF Investment Bank, MoneyMatch, & Jirnexu, and AEON Financial Service Co., Ltd., AEON Credit Service (M) Berhad and MoneyLion Inc are the five out of 29 applicants chosen by BNM to conduct either conventional or Islamic banking business in Malaysia, and this, without a doubt, will be one of the biggest disruptions to the country’s financial services market!
So, what is a digital bank?
The COVID-19 pandemic has changed consumer and business behaviour, demanding more digital delivery and cost-effective financial solutions. The adoption of mobile and online banking has increased significantly, and this widespread adoption will continue to last even when the pandemic is over. As a matter of fact, mobile banking transactions rose to RM800 billion in 2021. This is an opportunity for banks, credit unions, and other financial institutions to embrace the benefits of digital banking.
In simpler terms, digital banking works the same way as most traditional banks, except it is fully operated online. This means that almost all banking activities that were previously only available at bank branches can now be done online with digital banking. They are, however, different from online banking that is offered by most traditional brick-and-mortar banks. For instance, online banking primarily focuses on essential transactions such as money transfers, bill payments and basic online account management. On the other hand, digital banking is all forms of financial services, transactions and operations that are only available online.
The Digital Banking Framework proposed by BNM
The issuance of the Policy Document on Licensing Framework for Digital Banks seeks innovative applications of technology in the financial sector. It also aims to support the country’s unserved and underserved market segments through innovative business models by offering banking products and services that address the specific needs of the underbanked population. Thus, all licensees have their business objectives aligned, that is to serve the unserved and/or underserved segments. Besides that, one of the main considerations of the assessment is that a licensee must ensure the best interests of Malaysia. Hence, the Licensing Framework suggests that applicants may reflect such commitment by offering BNM with an enforceable shareholders’ undertaking.
BNM also included a three to five-year foundational phase, as well as the submission of a five-year business plan. During the foundational period, all licensees must maintain a minimum of RM100 million in capital reserves unimpaired by losses, and the total size of assets must not exceed RM3 billion at all times. Furthermore, licensees must comply with all regulatory criteria applicable to an existing licensed bank or licensed Islamic bank by the end of the fifth year from the date of operation, as well as reach a minimum amount of capital reserves of RM300 million unimpaired by losses.
How does it benefit us?
One of the advantages of digital banking is giving customers the freedom to bank whenever, wherever and however they want, and it only gets better with features such as real-time assistance and personalised services. For instance, digital banks provide real-time assistance by delivering instant support through tools like chatbots to scale their customer support. Meanwhile, a complete grasp of customers’ behaviour through data and insights collected made hyper-personalisation possible, enabling digital banks to recommend products and services that match their needs. Therefore, banks, credit unions and other financial institutions that provide digital banking experiences will gain an upper hand in the competitive landscape as digital banks have agility, personalisation and enhanced user experience advantages.
In addition, digital banking’s ability to collect alternative data can also be used to enhance credit scoring and credit reporting. Alternative data can provide lenders with valuable customer insights to help them offer better financial services to the unbanked and underserved segments. For example, in the lending landscape, most banks and financial institutions are sceptical when it comes to approving loan applicants that lack traditional credit data and credit history as they have a high risk of default. Thus, these applications are rejected most of the time. Digital banks, however, allow non-traditional ways to do credit scoring. By collecting data such as consumer spending behaviour through digital channels like e-wallet apps, digital banks can create their own alternative credit data, and make use of them to rate an individual’s creditworthiness before denying or approving an application.
Furthermore, digital banks are much cheaper to operate compared to incumbent banks. Operational costs such as physical branches maintenance fees and labour costs incurred by traditional banks are not applicable to digital banks. Hence, digital banks are able to offer cost-effective financial services to retail customers and the underserved business community such as individuals from lower-income groups. By immensely improving their financial well-being, BNM believes that not only will the underbanked community be taken care of, but it will also promote an inclusive financial sector, fostering the growth of Malaysia’s economy.
Greater financial inclusiveness for Malaysians as a whole
Digital banking will drive greater financial inclusion in Malaysia. Both consumers and small and medium-sized enterprises (SMEs) are expected to benefit from financial digitisation, as cheaper banking options and innovative financial products and services become available.
The impact on SMEs
With a contribution of a total of RM512.8 billion to the national GDP just last year, SMEs are, no doubt, the backbone of the Malaysian economy. Banking institutions have always been the go-to source of financing for SMEs, and these institutions provide more than 90% of the total financing needed. Digital banks will leave an impact on SMEs by offering more accessible loans, and in contrast to traditional banks, will take a more borrower-centric approach to banking, offering personalised financial solutions, fast approval and disbursement of funds, simplified lending processes, competitive pricing, etc. One thing worth noting is that digital banks will also play a part in helping traditional banks transform their financial services and banking operations by pushing them to also look after the underbanked population.
The impact on consumers
A recent study by Visa highlighted that over 74% of Malaysians are aware of digital banking and a majority (66%) are eager in using its services, particularly for financial wellness. Customers are increasingly expecting banks and financial institutions to not only manage their money, but also to guide and advise them on how to better manage their finances for the future. Thus, 64% of Malaysian retail banking decision-makers are increasing their company’s spending on digital and engagement financial wellness initiatives, according to a study on the State of Banking and Financial Wellness commissioned by Backbase and conducted by Forrester Consulting. Digital banking has an advantage in this area as it is more involved in customers’ lives, turning the data collected such as customers’ financial behaviours into personalised money management insights.
Besides that, digital banks are in a prime position to promote financial literacy to the unserved and underserved communities. Digital banks could provide education, advice and guidance in various forms which create awareness of responsible use of suitable financial solutions. This ultimately will boost their financial health.
The future of digital banking in Malaysia
The financial industry and the banking sector have been continuously going through various stages of transformation and digitisation, and digital banking is one of them. The existence of digital banks will affect the way we bank and the way we manage our finances, including everyday banking transactions and operations, credit scores, personal finance, insurance, investments, loan applications and many more.
Though digital banks in Malaysia will focus on serving the unserved and underserved markets such as the B40 groups and micro-SMEs, we believe that each digital bank will offer a unique proposition that is relevant to the needs of our community. BNM envisions the emergence of digital banks will boost the growth of the country’s economy, support the transformation of the financial ecosystem to meet the future economic needs of the nation, and promote a sustainable and inclusive financial sector in Malaysia.
JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.
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